Gold ETF Assets Show Bullish Sentiment

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As gold prices push out toward the apex of a symmetrical triangle structure, gold ETF investors seem to be betting as a group on a big upside breakout for gold prices. But that very uniformity of opinion may be what dooms the rally attempt.

The two big gold bullion ETFs are GLD and IAU. GLD got a jump by coming to market in November 2004, just two months prior to the launch of IAU. But that two month head start gave GLD a big advantage in terms of attracting investors. IAU has been trying to catch up ever since, and it got a big boost in investor interest when it cut its fees to below those of GLD. But GLD is still the assets leader.

I combine the two ETFs assets into a single indicator in this week's chart. The units are the total tonnes (1000kg) held by the two ETFs. The number of tonnes goes up and down with investor interest in being invested in gold, and the sponsoring firms issue or redeem shares as needed to keep the ETFs' share price close to the net asset value. When they issue more shares, they immediately turn around and buy more gold bullion with the proceeds.

So when you see the total assets rise, it means that more people are investing money into these ETFs. Not surprisingly, rising gold prices tend to be what gets people more interested in investing in gold, and falling prices provide an incentive to cash out. The key insight comes from being able to notice when that tendency has gone too far one way or the other.

In the chart, we can see that total assets are all the way back up to where they were in August, when gold was building a big top ahead of its 16% decline. And this surge in investor interest comes even though gold prices are still well below that August high, meaning that sentiment has swung farther toward the bullish side that the price movement might have justified.

At the same time we are seeing bullish sentiment reflected in the ETFs, there is another sign of a problem. We recently featured a chart in our Daily Edition on Dec. 1 (subscription available here) showing that gold lease rates are climbing in London in a way similar to what we saw in September 2011, just before the plunge. It appears that gold investors are getting bullish just as a squeeze is mounting in the gold lease market, which is a setup for a big drop like September's. It is not a sign that such a decline has to start right away, just that the conditions are ripe.